RWE Pays Big For Dutch Deal

Even as the euro zone struggles to lift its head out of a recession, German utility RWE is still prepared to pay a hefty premium to seal a big deal. The firm said on Monday it has agreed to pay a total of 9.3 billion euros ($12.4 billion), including debt, for most of Dutch state-owned utility Essent, a move that makes sense strategically while still raising a few eyebrows over the price.

"It's at the very upper end of the broad range that had been rumored," said Michael Schaefer, an analyst with Equinet, referring to reports that claimed a 6.0 billion ($8.0 billion) to 10.0 billion-euro ($13.3 billion) bid was in the works. He told Forbes that paying a 30.0%-40.0% price premium for a company in the current market environment seemed rather generous, despite the obvious strategic fit.

Shares of
RWE
fell 2.1%, or 1.31 euros ($1.75), to 61.82 euros ($82.42), during afternoon trading in Frankfurt on Monday. Although the company did not offer a detailed breakdown of Essent's debt and equity levels, it said that its total cash offer of 9.3 billion euros was about 9.6 times Essent's earnings before interest, tax, depreciation and amortization.

There may have been pressure on RWE to win the deal after it failed to acquire nuclear operator British Energy last year. The German utility reportedly put in a bid of about 11.0 billion pounds, but French rival
Electricite de France
ended up winning the race with its own 12.5 billion-pound proposal. (See "EDF Glowing After British Nuclear Deal.") Electricite de France also managed to defuse a rival Warren Buffett bid for Constellation Energy, by offering $4.5 billion for half the company.

RWE said the Essent acquisition would bring in 5.3 million extra customers and would reduce its average carbon-dioxide output, while generating 100.0 million euros ($133.6 million) in annual synergies over the next five years. Essent is the Netherlands' biggest utility by sales and is owned by Dutch municipal and regional authorities.

Essent became vulnerable to a takeover after failing to merge with rival Nuon in 2007. Nuon reportedly invited bids for a minority stake last year, with British utility Centrica a potential candidate.